Dixon v. Commissioner

• Decision Date: 10 May 2006
• Docket Number: Dkt. No. 40159-84.,Dkt. No. 29643-86.,Dkt. No. 9382-83.,Dkt. No. 15907-84.,Dkt. No. 30979-85.
• Parties: Jerry and Patricia A. Dixon, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

91 T.C.M. 1138

T.C. Memo. 2006-97

Jerry and Patricia A. Dixon, et al.¹ v. Commissioner.

Dkt. No. 9382-83.

Dkt. No. 15907-84.

Dkt. No. 40159-84.

Dkt. No. 30979-85.

Dkt. No. 29643-86.

United States Tax Court.

May 10, 2006.

Henry Binder and John A. Irvine, counsel for petitioners in docket Nos. 9382-83, 15907-84, 40159-84, and 30979-85.

Michael Louis Minns and Enid M. Williams, counsel for petitioners in docket No. 29643-86.

CONTENTS

                Background
                Discussion
                I.      Introduction
                        A.     Overview of Section 7430
                        B.     Tax Court's Authority To Award Appellate Fees Under Section 7430
                        C.     The Other Side of the Coin: Inapplicability of Section 6673(a)(2) and the Bad
                               Faith Exception
                II.     Entitlement to Relief Under Section 7430
                        A.     Respondent's Position
                        B.     Paid or Incurred Requirement
                               1.      Overview
                               2.      Real Parties in Interest
                       C.      Substantial Justification Defense
                               1.      Identifying "the Position of the United States in the Proceeding"
                               2.      Substantial Justification Analysis
                       D.      Conclusion
                III.   Amount of Award
                       A.      Respondent's Position
                       B.      Applicability of Statutory Rate Cap
                               1.      Limited Availability of Qualified Attorneys
                               2.      Local Availability of Tax Expertise
                               3.      Difficulty of the Issues
                               4.      Other Possible Special Factors
                                       a.     In General
                                       b.     The Government's Misconduct
                                       c.     The Delay Factor
                                       d.     Test Case Status
                             5.        Conclusion
                      C.     Compensable Hours
                            1.         Respondent's Objections
                                       a.     Duplicative Fees Due to Change of Counsel
                                       b.     Overstaffing
                                       c.     Porter & Hedges Client Conferences
                

                           2.          Additional Adjustments to Time Claimed for the Appeals
                                       a.     Missing Minns Time Entries
                                       b.     Minns Hours Relating to Dispute With Committee
                                       c.     Additional Porter & Hedges Time Relating to Minns Dispute
                                       d.     Porter & Hedges Time Relating to Bill of Costs
                                       e.     Porter & Hedges Time Relating to Remand
                          3.           Adjustments to Porter & Hedges Time Relating to Fee Request
                                       a.     Initial Research Time
                                       b.     Time Relating to Unsuccessful Claims
                     D.   Computation of Potentially Compensable Fees
                          1.           The Hongsermeiers—Work on the Appeal
                                       a.      2001
                                       b.      2002
                                       c.      Total
                         2.            The Hongsermeiers—Work on the Fee Request
                                       a.      2003 to 2005
                                       b.      2006
                                       c.      Application of Limited Success Factor
                         3.            The PH Petitioners
                                       a.      2001
                                       b.      2002 to 2005
                                       c.      2006
                                       d.      Total
                     E.  Potentially Compensable Expenses
                     F.  Amounts Paid or Incurred by Eligible Persons
                         1.            Amounts Paid Through the Defense Fund
                                       a.      Minns Agreement
                                       b.      Porter & Hedges Agreement
                        2.             Amounts Paid Directly to Minns
                        3.             Amounts Incurred But Not Paid
                        4.             Summary
                    G.  Final Figures
                IV. Interest
                Appendix A—September 1, 2005 Order
                Appendix B—September 8, 2005 Order
                Appendix C—November 18, 2005 Order
                

MEMORANDUM OPINION

BEGHE, Judge:

These cases are before the Court on separate remand from the Court of Appeals for the Ninth Circuit. In this opinion, we address petitioners' requests for appellate attorney's fees and expenses under section 7430,² originally filed with the Court of Appeals in the aftermath of Dixon v. Commissioner [2003-1 USTC ¶ 50,194], 316 F.3d 1041 (9th Cir. 2003), revg. and remanding [Dec. 53,314(M)] T.C. Memo. 1999-101.

Background³

Petitioners (the Dixons, DuFresnes, Owenses, and Hongsermeiers) are, along with one other couple—the Youngs—the remaining test case petitioners in the Kersting tax shelter litigation. That litigation arose from respondent's disallowance of interest deductions claimed by participants in various tax shelter programs promoted by Henry F.K. Kersting during the late 1970s through the 1980s. Under the test case procedure, most of the other Kersting program participants who had filed Tax Court petitions ("nontest case petitioners") entered into "piggyback" agreements in which they agreed that their cases would be resolved in accordance with the Court's opinion in the test cases.⁴ Eventually, more than 300 nontest case petitioners made periodic and/or lump sum contributions to a fund (hereafter, the "Defense Fund" or "Fund") created to share the cost of the test case litigation.⁵

Following a 3-week trial, the Court sustained virtually all of respondent's determinations in each of the test cases. See Dixon v. Commissioner [Dec. 53,832(M)], T.C. Memo. 1991-614 (Dixon II).⁶ Shortly thereafter, on June 9, 1992, respondent notified the Court that, prior to the trial of the test cases, respondent's trial attorney, Kenneth W. McWade (McWade), and his supervisor, Honolulu District Counsel William A. Sims (Sims), had entered into contingent settlement agreements with two of the test case petitioners (the Thompsons and the Cravenses) and had failed to disclose those agreements to their superiors, to the Court, or to the other test case petitioners or their counsel. Respondent asked the Court to conduct an evidentiary hearing to determine whether the undisclosed agreements had affected the trial of the test cases or the opinion of the Court. The Court denied respondent's request for an evidentiary hearing, entered decisions giving effect to the Thompson and Cravens settlements, and reentered or allowed to stand the decisions sustaining respondent's determinations against the other test case petitioners.

On appeal, the Court of Appeals for the Ninth Circuit, citing Arizona v. Fulminante, 499 U.S. 279, 309 (1991), stated:

We cannot determine from this record whether the extent of misconduct rises to the level of a structural defect voiding the judgment as fundamentally unfair, or whether, despite the government's misconduct, the judgment can be upheld as harmless error. DuFresne v. Commissioner [94-1 USTC ¶ 50,286], 26 F.3d 105, 107 (9th Cir. 1994) (per curiam), vacating Dixon v. Commissioner [Dec. 47,801(M)], T.C. Memo. 1991-614.]

The Court of Appeals vacated the Court's decisions in the test cases (other than the Thompson and Cravens cases) and remanded them for "an evidentiary hearing to determine the full extent of the admitted wrong done by the government trial lawyers." Id. In response to the direction of the Court of Appeals to consider on the merits all motions of intervention filed by interested parties, this Court ordered that the cases of 10 nontest case petitioners (hereafter, the participating nontest case petitioners) be consolidated with the remaining test cases for purposes of the evidentiary hearing. One of the participating nontest case petitioners was represented by Joe Alfred Izen, Jr. (Izen), who had represented the test case petitioners (other than the Thompsons and Cravenses) at the original trial; the others were represented by either Robert Alan Jones (Jones) or Robert Patrick Sticht (Sticht).

On the basis of the record developed at the evidentiary hearing, the Court held that the misconduct of the Government attorneys in the trial of the test cases did not constitute a structural defect in the trial but rather resulted in harmless error. See Dixon v. Commissioner [Dec. 53,314(M)], T.C. Memo. 1999-101 (Dixon III). However, the Court imposed sanctions against respondent holding that Kersting program participants who had not had final decisions entered in their cases would be relieved of liability for (1) the interest component of the addition to tax for negligence under former section 6653(a), and (2) the incremental interest attributable to the increased rate prescribed in former section 6621(c).

After the issuance of Dixon III, the remaining test case petitioners, all of whom were still represented by Izen, and some of the participating nontest case petitioners filed motions for attorney's fees and costs (the initial fee requests), relying primarily on sections 7430 and 6673. The Court ordered the movants to submit documentation pertaining to fees and expenses incurred commencing June 10, 1992 (i.e., the day after the Court learned of the misconduct by the Government attorneys). In Dixon v. Commissioner [Dec. 53,832(M)], T.C. Memo. 2000-116 (Dixon IV), the Court rejected the initial fee requests insofar as they relied on section 7430, on the ground that the movants had not substantially prevailed on the merits as required by section 7430(c)(4)(A)(i). However, the Court awarded a portion of the claimed fees and expenses under section 6673(a)(2)(B) (relating to misconduct of the Commissioner's attorneys in Tax Court proceedings).

The Court entered decisions in the remaining test cases and certified the cases of the participating nontest case petitioners for interlocutory appeal. Izen filed notices of appeal on behalf of the remaining test case petitioners, and he also filed an interlocutory appeal on behalf of Norman and Barbara Adair, the participating nontest case petitioners he represented.⁷ Izen purported to file his interlocutory appeal on behalf of not only the Adairs, but also on behalf of nontest case petitioners in more than 450 docketed cases who had not participated in the evidentiary hearing and...